Business Funding post covid-19

 

Has the covid-19 pandemic has changed the way we think about business funding? This article looks at what has changed.

Like nearly everyone, I’ve been working on a problem in business financing since the pandemic started, specifically in support of a digital marketing agency we launched in 2015. As the government and businesses have both tightened their belt ever since the global outbreak was declared, funding companies has had to reorganize operations in ways that may leave one income stream and one method of funding precarious. On November 22, CBRE reported that the coronavirus pandemic’s nine-month impact on property acquisition financing was 8.9%. According to a well known business plan consulting firm, Finance & insurance was hit the hardest, particularly after the IPO of securities juggernaut AIG Health that saw its net income drop 55% from the previous year. Zillow projects that credit markets might be tightening even further, as lenders continue to hesitate loan requests and refinance demand. While some financing strategies may be affected most (such as private placements), the need for diversifying income streams through loans has never been greater. This shift towards a cash-based economy makes it more difficult to complete the type of project financing that has made real estate investing so lucrative. Some investors have jumped ship according to CBRE. While there are still deals that can be won—some of which may be harder to find—collateral is a competitive advantage for lenders that can mitigate the risk of lending out. To overcome a reduction in private placements, some property developers have simply shifted more of their crowdfunding efforts into other industries. Others, though, have turned to traditional investors for financing. Communities across the U.S. have turned to property investors for financing in growing numbers. 

There have been more than 37 million individual property owners who—after signing a promissory note or mortgage—were directed to an investor—many other than the initial tenant—so they could buy a listed house. Granted, the exact numbers are harder to compile. But, centralized property ownership groups will typically base a mortgage request on information obtained from one single member of the group or possibly a single member alone to show that they are a suitable borrower, with the lender only seeking information on other profiles. Property investors on the whole are not new to lending. Hedge funds, like Horizons Capital or Auction Roadside Property Group, have staked their claim for decades. But crowdfunding has made many of these traditional methods more streamlined, driving down the cost of a loan. Whether using boards of directors, crowdfunding platforms, or traditional lenders, investors can work on projects that they otherwise wouldn't get access to. 815,795 loans were placed on local homebuyers last year. Of these, 82% were cash deals, ranging from $1,000 to $300,000, according to RealtyTrac. 

Broadly event-driven funding Traditional event marketing has been taking a nosedive over the past few years, and a lot of that acceleration has been driven by COVID-19. For years now, we've seen events increase in value as sponsorships, mule campaigns, virtual offerings, and other platform options become more plentiful, allowing brands to reach an ever-growing audience—the paid side. More recently, event companies have been adding affiliate marketing to their offerings to take advantage of forced affiliate mobility and the all-over pricing power of EMDs (earned media links). That's exactly the pattern obvious to anyone who follows the patterns in any of the "Big Four" digital ad ecosystems: Adweek's Digital Media Shift report notes the reach and quantity of paid digital advertising as well as the roles each is playing. 

When American Airlines rebrands, it sends ledgers around the world full of money from the ad revenues alone. The globe-trotting assortment of digital ad inventory that now adorns digital TV, radio, Fitbit, and billboards is characterized more by connective tissue than ads per se, and I consider paid and sponsored content the brainchild of marketers more interested in events than transactional revenue. Meanwhile, driverism continues unabated. The gig economy, most importantly the aspect of it synonymous with contractors, is growing quickly, with widespread mistrust in the corporate world and a proclivity for individualism. That's left many potential users of dollars and hours with less need for brand loyalty, a less need for events with higher costs and lower attendances, and usually less money in their hands. Has an Event-Driving Business Model Been Imploded by COVID-19? When I was in my 30s and having lunch with other business owners who were aiming for the big leagues of sponsorship-based event-based revenue generation, one of the things that stood out to me was the zigzag nature of traditional event marketing. A recognizable entitysponsor an event that takes place somewhere in the world, the model is simple: Events for advertising placements are no longer unique to big chains or ambassadors of companies with big budgets; advertisers are seeing the value in the event itself. It's possible, and even probable, that there are similar patterns in the COVID-19 markets where it's increasingly hard for an entity to claim or fulfill any real-world business function. So, is it now only an asset market where sponsors are seeking the few earmarked slots at famous events to sell ads? Is it only an asset market where unique big brands are willing to take any and all ads everywhere they can to keep their mid-to-large audience engaged, curious, and, hopefully enthusiastic to pay them a single visit in the future? No. 

Or hasn’t. In March of 2020, the COVID-19 pandemic shut down the world’s economy. Unemployment soared, with millions of people out of work. The stock market had fallen nearly 25 percent by the end of March, wiping out billions in investor profits for the year. The Federal Reserve drastically lowered interest rates to zero in an attempt to stimulate the economy. With businesses unable to pay employees, increased number of corporate defaults and billions of dollars flushed down the toilet, the world went into a state of emergency. Confidence in the economy was shaken and people began to tighten their belts. To make ends meet, many took out loans to make businesses whole again. The Impact on Business Financing In contemporary times, business financing tends to be broken down into two basic parts: debt or loans and equity. Typically, businesses take out debt when the business needs capital to spend or grow, and they use equity to pay off debt when the business can hold on to it without paying any additional interest. In both cases, the government backs the loans. During the Great Recession, nearly 80 percent of business financing in the United States relied on debt, whereas only about 40 percent did so in the aftermath of the dot-com bubble in 2000. As the COVID-19 pandemic rolled out, financiers and businesses around the world scrambled to find funding ways to avoid defaulting on debts. Signs of Recovery As hopes of a quick “pandemic”-fueled rebound regained some steam in late March of 2020, the international shadow banking system began to slowly emerge. The delays and hesitations in global financial transactions that plagued the early days of the Coronavirus crisis seemed to resolve themselves by mid-April; various banks and payment systems began to function more smoothly. Across the United States, statistics suggested that labor-intensive industries were beginning to stabilize. The shadow banking system began to emerge (although still in a relative “shoulder-diving” stage), and for the first time in years, businesses seemed to be making profits. The subtleties of COVID-19 that had reared their ugly head made the economy receptive to the potential benefits of shadow banking and greater lending ease. Researcher Ryan Sweet of Regions Bank found that interest rates in coastal Asia—such as Hong Kong, Singapore, Japan, and Taiwan—fell to record lows. This was largely due to private investors taking on more risk and raising capital for businesses after the failure of major investment funds in the United States. Although this lowered borrowing costs, in terms of the rate of return on capital, it also put downward pressure on interest rates.

Does Peer to Peer Lending Offer a Promising Future?

Peer to peer lending has for the past ten years become more mainstream in supporting business to access business funding in an alternative way.

As with any new lending or investing avenue, there were growing pains that caused different results than those that were expected.

What Attracted Lenders

Peer to peer lending is a simple concept that involves the use of other people's money by those needing to establish a loan. The reason it was attractive in the first place was the return on the money loaned was substantially better than could be expected from a savings account or investment of funds in stocks.

Companies that sprung up to be the caretakers of this funding promised to be the watchdogs, do the credit checks, and make peer to peer lending safe for those who chose to invest or save in it. In the early phases, things did not work out well through some of these companies.

What Actually Happened

Many of the earlier firms that dealt out the money to borrowers did not concern themselves enough with credit checks on those requesting the money. Unlike banks, they took those who were higher risks, and many defaulted on their loans.

Although the interest rates on the loans were attractive to lenders, they were markedly lower than what the borrowers were paying to credit card companies. This is why peer to peer lending was interesting to borrowers.

The companies that were more conservative took the banks' lead and looked into the credit history of those requesting loans. Instead of maintaining standard rates for everyone who wanted to borrow money, they based the rates on payment history and credit scores. Those with extremely low scores didn't get the money, so it was less risky.

Peer to peer lending was pictured as a way everyday people could help the little guy out while snubbing their noses at the big banks. That may have been the case in some instances, but it proved to be more popular with investors for wealthy families seeking a bigger return on assets and hedge funds.

How Well Does Peer to Peer Lending Work

After the early years, peer to peer lending began to undergo adjustments and lenders saw a reasonable return on their investments. Some borrowers still make up stories to get more sympathy or look more capable of repayment, but the checks and balances have improved so the defaults are greatly down from the inception of peer to peer lending.

Lenders have a choice as to where they want to use their money. It is tempting to take a 10% to 14% return for a loan that is not as secure as some others are, but that is the trade-off for the better return offered. More conservative lenders don't get the big buck returns, but they are more assured that they will get their money.

Even though peer to peer lending is in its infancy, it has already proven to be a way to earn a respectful return on money. Some investors are still waiting to see how well it will perform for another year or two.

The interest rates are bound to level out some before the growing pains of peer to peer lending run their course. Of course, those who wait may see a great drop in earning potential before they make a commitment.

From the borrower's side of the fence, peer to peer is a good avenue to pursue if there is a real necessity. The rates between credit cards and peer to peer lending are closer now than before, so it might not be advantageous to pay one debt to assume another.